Entrepreneurial spaces less than $10 mn attract few VC investors

(Left to right) Rahul Khanna and Sumant Mandal, the India-focused investment team for Clearstone Venture Partners

Updated: Tue, Aug 28 2007. 12 03 AM IST

The India-focused investment team for venture capital (VC) investor—Clearstone Venture Partners—comprises Rahul Khanna and Sumant Mandal. Clearstone has two offices in California and one in Mumbai. The firm has $650 million (Rs2,665 crore) in committed capital under management, focuses on technology companies—notably in the Internet and wireless spaces, and currently is investing in India from its global Clearstone Fund III.

Khanna moved back home to Mumbai from Silicon Valley in the US, in 2005 to set up Clearstone’s operations here. Mandal, based in the Valley, joined the firm in 2000 and initiated Clearstone’s investment gameplan for India. Mandal and Khanna have been entrepreneurs or involved with start-up companies, both in India and in the US, prior to turning VCs. Dealmaking has been slow, compared with peers—investments include IndiaIdeas.com Ltd (BillDesk), Games2Win India Pvt. Ltd and DGB Microsystems Pvt. Ltd—but both Khanna and Mandal say the firm is on track with its investment thesis for India. Mint spoke to them at their Mumbai office a few weeks ago on their India run.

Edited excerpts:

(Left to right) Rahul Khanna and Sumant Mandal, the India-focused investment team for Clearstone Venture Partners

Why has deal closure been slow?

Mandal: It has been slow because we’ve kept the bar high. We want to maintain the same return-risk profile here as anywhere else in the world where we make investments. That means we would apply the same due diligence when looking at deals here as we would in the US because we want similar rate of returns here. That does slow down things a bit, but in the longer term it means higher performance for the firm overall.

Has your investment thesis changed from when you started here?

Khanna: When we started out, we were clear that we would focus on high-growth, consumer-driven sectors. That remains the case but we’ve realized that businesses take longer to mature in this market. So if we thought it was three years, it is actually five. We also found that it is very hard to find talent and quite difficult to convince experienced people in larger companies to take the plunge into entrepreneurship.

Can you elaborate on the ‘venture partner’ model that you apply to investee companies?

Mandal: The model is new to India but we’ve been doing this for a while in the US. Venture partners are industry specialists, usually very senior executives drawn from various sectors, who work alongside the management teams in our portfolio companies. They are distinct from the Clearstone investment team. So the investment team, for instance, Rahul in India, would close the deal, and subsequently, a venture partner would take over as mentor to the investee company’s management team. It is a sort of quasi-operating role. We have not introduced this here yet, but will shortly.

What’s your sweet spot for deal and stake sizes?

Khanna: We think the sub-$10 million space is quite underserved in India, both by intermediaries and other VCs. That suits us fine because we typically like to stay out of auction deals, which is often the case with deals sourced through intermediaries.

Also, we like to take our time and get to know the firms first. In terms of the stakes we pick up, it is usually in the 20-30% range and has never gone beyond 49%. We like to ensure that a healthy proportion of the firm’s equity is held by the founders and employees.